Diamond Dollars: The Economics of Winning in Baseball (Part 1)by Vince Gennaro
March 22, 2007
Winning by the Numbers
For an MLB team, it pays to win. But in the local market-driven structure of Major League Baseball the spoils of victory can range from pennies to millions. The rewards from winning vary based on three key variables—an economic system driven by the size and fan loyalty of a team’s local market; the team’s level of competitiveness, defined by its regular season record; and the windfall of revenues that accrue to a team for reaching the postseason. The win-curve is an attempt to quantify the implicit contract each team has with its fans, season ticket holders, and sponsors. At various levels of competitiveness—conveniently measured by annual win totals—fans will allocate varying amounts of time and money to support their favorite ballclub. The more successful the team, the greater the fan and sponsor support, and hence the higher the revenue totals.
In order to sort out these effects for each team, we can turn to the regression analyses to estimate the win-curve for each team (discussed in more detail in an earlier chapter). By analyzing historical data that captures fan behavior, we can ultimately assign an estimate of a dollar value for each win. More specifically, the model estimates the change in a team’s revenues at various levels of team regular season wins. For example, the Houston Astros are expected to generate $1.2 million more revenue as an 81-win team versus an 80-win team. That’s equivalent to saying the value of the Houston Astros' 81st win is $1.2 million. At the extremes, the Pittsburgh Pirates 71st win generates about $300,000 in incremental revenue, versus the $4.2 million that accrues to the Yankees for their 90th win.
Later I will discuss the Yankees in more detail, but first let’s examine the differences across markets and teams. Since the win-curves are not linear—meaning all wins are not valued the same—and the slope of the curve varies by team, an apples-to-apples comparison looks at the change in teams’ revenues at the same point on the win-curve. Figure 1 shows the value of the 81st win—meaning the marginal or incremental value of the last win for a team that plays .500 winning percentage baseball for a season. Alternatively, we can think of the value of the 81st win as the difference in revenue for the team if it won 81, rather than 80 games for the season.
Figure 1 - Dollar Value of 81st Win TEAM $ VALUE NYM 1.4 ATL 1.2 SF 1.2 HOU 1.2 SEA 1.2 BOS 1.2 NYY 1.1 LAA 1.1 CWS 1.0 STL 1.0 CHC 1.0 CLE 1.0 PHI 0.9 AVERAGE: 0.9 TOR 0.9 LAD 0.8 MIL 0.8 TB 0.8 COL 0.7 FLA 0.7 ARI 0.7 KC 0.7 DET 0.7 SD 0.6 BAL 0.6 MIN 0.6 OAK 0.6 TEX 0.5 CIN 0.5 PIT 0.5 $ Value in millions, based on 2006 win curve
When evaluating a team’s marginal revenue at the 81st win level, the value is nearly entirely related to fans’ immediate response to regular season wins. Since the probability of an 81-win team reaching the playoffs is 2%, only a small portion of the playoff revenue stream is included in the 81st win calculation. By contrast, if we look at the value of the 90th win (Figure 2), we incorporate more of the value of the postseason revenue stream, as well as capture a team’s fans response to a highly competitive winning ballclub. Some teams’ rankings change considerably when comparing the two different points on the win-curve. The Mets, Mariners, Giants, Yankees, Red Sox, White Sox, and Cardinals remain in the top one-third of revenue for all teams for both win levels. However, the Braves move from second highest ranking at 81 wins, to 23rd highest at 90 wins, possibly reflecting Braves fans’ weak response to appearing in the postseason and their relative apathy to a competitive team.
Figure 2 - Dollar Value of 90th Win TEAM $ VALUE NYY 4.3 NYM 4.2 CHC 3.8 LAD 3.6 CWS 3.5 SF 3.5 PHI 3.4 STL 3.3 BOS 3.0 BAL 3.0 TOR 2.9 CLE 2.9 HOU 2.9 AVERAGE: 2.8 TEX 2.8 LAA 2.7 ARI 2.7 SD 2.6 DET 2.5 COL 2.4 TB 2.1 FLA 2.1 ATL 2.1 MIL 2.0 OAK 1.8 CIN 1.8 PIT 1.7 KC 1.7 MIN 1.6
It’s also interesting to evaluate the revenue change over five-win increments. For example, if we look at the marginal revenue when a team moves from the 86- to 91-win level, it sheds light on a team’s economics in a playoff contention mode. Alternatively, we can think of the marginal revenue from the 78- to 83-win level as the economics of teams’ quest for respectability. The marginal revenue totals in the latter case are more clustered than the marginal revenue for teams in playoff contention. To measure the dispersion of the value of wins for each category, we can look at the standard deviation across all teams. The standard deviation of the “respectability” category is $1.2 million, vs. $3.2 million for the “playoff contention” category. This difference may suggest that as a team moves up its win-curve to become a playoff contender, the rich get richer and the poor get poorer.
The implication is that weaker revenue teams can effectively compete with the “big boys,” as measured by the value of a win, when both have non-contending status. However, when teams strive to reach that 90-plus win zone in their quest for a playoff spot, it becomes more difficult for the economically challenged teams to compete for players with the high revenue, or high-fan-loyalty teams. Included in the 86- to 91-win playoff contention marginal revenue estimate for all teams is a portion of an anticipated revenue stream that would accrue to the team for reaching the playoffs. The economically advantaged teams typically expect a higher postseason revenue stream, further separating them from their weaker revenue counterparts and making it difficult for the disadvantaged teams to justify competing for players in the free-agent market.
A team’s location on the win-curve—their absolute level of wins—has a dramatic impact on the value of a win. To understand the power of the win-curve location, you only have to look as far as the marginal revenue of a Twins team in playoff contention. A five-win improvement for financially challenged Minnesota, from 86 wins to 91 wins, would yield $6.8 million in incremental revenue. When comparing this revenue estimate with teams who are striving for respectability (78- to 83-win category), their marginal revenue is greater than all teams, except the Mets. The location on the win-curve is so important that it often trumps market size as the key driver of a team’s marginal revenue opportunity.
Figure 3 $ Value of five wins TEAM 78-83 86-91 CHC 4.8 15.9 NYM 7.1 18.0 LAD 3.8 15.1 BOS 5.8 13.3 LAA 5.2 11.8 CLE 5.0 12.5 TOR 4.3 12.5 CWS 5.2 14.9 SF 6.2 15.2 ATL 6.1 9.6 OAK 3.0 7.7 STL 5.1 13.9 PHI 4.5 14.5 HOU 5.9 12.5 SEA 5.8 16.1 MIL 3.8 8.5 TEX 2.7 11.4 MIN 3.0 6.8 DET 3.4 10.4 AVERAGE: 4.2 11.7 SD 3.3 10.8 ARI 3.6 11.3 BAL 3.1 12.3 NYY 5.6 18.4 CIN 2.6 7.5 PIT 2.3 7.3 TB 3.9 9.1 FLA 3.5 9.0 KC 3.6 7.4
The slope of the win-curve can vary across teams, reflecting the degree of fan responsiveness to changes in wins. Comparing the Yankees to the Braves illustrates two extreme examples. Yankees fans maintain a high expectation regarding their team’s competitiveness and expect the Yankees to win and reward them accordingly. To think about this in the reverse, or negative, we could say that if the Yankees don’t contend for the postseason, attendance and fan support would drop precipitously, as the team would fall far short of fan expectations. The result is a steep win-curve. Conversely, the Braves have a long-standing loyal fan base, which seem to be unfazed by their consistent success, leading to a flat win-curve. A comparison of the two win-curves shows the Braves generate more marginal revenue until 89 wins, when the two lines cross and the Yankees leave the Braves in the dust from a marginal revenue standpoint. Moving from the 89- to 99-win level on the win-curve, the Yankees generate nearly $16 million in marginal revenue more than the Braves.
Vince Gennaro is currently a consultant to a MLB team and his analysis has been featured in The Sporting News and the New York Times. He has written for The Hardball Times Annual and Maple Street Press’ Red Sox Annual.
His book, Diamond Dollars: The Economics of Winning in Baseball is published by Maple Street Press and is available through maplestreetpress.com, Amazon, Barnes and Noble bookstores and other retailers.